Britain's banks say they are on track to meet lending targets set by the government under 'Project Merlin', but the figures were immediately disputed by small business leaders who said loans are becoming tougher to find, and more costly.

The five banks that make up 'Project Merlin' (Barclays, HSBC, Lloyds Banking Group, RBS and Santander) said they loaned £157.6bn to UK businesses during the first nine months of the year, pushing them slightly ahead of the target of £190bn for the full year. Lending to small and medium-sized firms lagged mildly behind, with the banks advancing £56bn in the first nine months compared to the £76bn full-year target agreed with the government.

A spokesman for the British Bankers Association said: "The Merlin banks are on track to meet their business lending commitments. The first nine months performance demonstrates the banks' commitment to providing businesses with the financial support they need to invest and grow and the significant progress made since February this year. However, the overall economic environment remains challenging and business demand remains weak."

But the Federation of Small Businesses said the figures didn't reflect the actual experience of small firms. Spokesman Andrew Cave said: "For small businesses and micro-business, lending is down and the cost of borrowing has increased. Conditions for the smallest businesses have worsened rather than improved since the start of Project Merlin. We also feel that the actual targets set for Project Merlin are exceptionally modest."

The banks' figures also contradict separate data from the Bank of England in October. Its trends in lending survey showed that the 12-month growth rate in lending to UK businesses was -3.3% in August. It also said that the stock of lending to businesses contracted by about £2.5bn in the three months to August.

Labour shadow Treasury minister Chris Leslie said: "The net lending figures show entirely the opposite picture to that put out by Project Merlin, and that lending is going in the wrong direction."

Leslie said that each bank has a separate definition of an 'SME' (small and medium-size enterprise), and that other statistical flaws made the figures almost meaningless.

"One of the crucial things about Project Merlin is that it doesn't touch on the price of lending to small firms. It's all very well saying that we are offering loans, but not if they are set at usurious rate," said Leslie.

In private, Sir Mervyn King, governor of the Bank of England, is understood to have criticised the Merlin targets for over-stating the true level of banks' support to the economy. The debate centres on what is measured – the amount of cash the banks make available for lending, or the sums that are taken up.

In August, Sir Mervyn said: "The amount of lending by the banking system to non-financial companies is falling. It's been falling for some while, and it's still falling. This is a natural consequence of the deleveraging of the banking system. But let's be clear about it, it is falling; and it's particularly problematic for small companies."

In October, the Chancellor, George Osborne announced a 'credit easing' plan for small businesses which opposition politicians said represented an admission that the Project Merlin deal between government and banks designed to increase lending to business had failed.